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Chinese airline stocks shot up on Thursday on renewed rumours of a sector-wide consolidation amid speculation over the next head of the aviation regulator.

Air China and China Southern Airlines' shares in Shanghai rose by the daily limit of 10 per cent, while China Eastern Airlines advanced 7.1 per cent.

The official Shanghai Securities News said a merger plan for the country's state-owned airlines may see Beijing-based Air China and Guangzhou-based China Southern become one, citing unconfirmed "market talks".

Both airlines later issued statements saying they had no knowledge of the plans.

With the country's reform of state-owned enterprises having led to the mergers of the biggest nuclear power firms and the biggest trainmakers, speculation of consolidation among China's Big Three airlines has been making the rounds.

A Xinhua report in June said the three airlines were to merge their cargo business, citing Civil Aviation Administration of China (CAAC) deputy administrator Zhou Laizhen, though the latter quickly denied the report.

An industry insider who requested anonymity said: "It is not improbable. The US offers precedents, for example the largest airline, American Airlines, is the result of mergers.

"Strategically from the state's point of view, combining north-based Air China and south-based China Southern makes sense. They will each get the US/EU routes and the Australian market is covered."

Air China Group, which owns Shenzhen Airlines - on China Southern's doorstep - has also been competing more against the China Southern Airlines Group than against China Eastern. This is unnecessary "infighting" the state would like to avoid, he said.

A corruption probe that has led to a major management reshuffle at China Southern, including the removal of five senior executives so far this year, has also "cleaned things up" at China Southern and would help pave the way for a major restructuring, he said.

The Shanghai Securities News report comes at a time when the CAAC is expected to announce a new chief to succeed Li Jiaxiang, formerly chairman of Air China before taking the top job at the regulator in December 2007.

Liu Shaoyong, chairman of China Eastern, has been widely tipped as Li's most likely successor. However, Lu Junhua, a vice-governor of Hainan province where the HNA group is based, has unexpectedly emerged as a possible candidate after a report, citing sources, appeared on Carnoc.com a news website owned by the CAAC, before it was quickly taken off.

This article appeared in the South China Morning Post print edition as: